Asked in Labor and Employment LawCompensation and BenefitsBusiness Ethics
What is the differences in a Discretionary bonus versus non Discretionary bonus?
January 07, 2008 9:52PM
As is generally the case in the law, it depends. The question is important because the answer dictates whether payment of a bonus is required. A discretionary bonus is based on no objective criteria and not routine, thus payment is not required. A non-discretionary bonus is paid routinely and/or based on objective criteria which may give rise to an implied contract requiring payment. A number of issues arise with respect to non-discretionary bonuses. As for the criteria used, shortages or losses usually considered a cost of doing business cannot be deducted when calculating a bonus. In one case an employer paid a bonus based on net sales. The net sales were determined by deducting cash and merchandise shortages from gross sales. This was determined to be an illegal deduction as the shortages deducted were considered costs of doing business and not the result of the employee's dishonest or willful act or other than the employee's simple negligence. An employer which does not condition earning on the employee's being employed at the time of payment runs the risk an employee who voluntarily quits may be entitled to the entire or a pro-rata share of the bonus. Furthermore, if an employee is terminated without valid cause before fulfilling the terms necessary to earn a bonus, the employee may be able to recover at least a pro-rata share of the bonus paid. In establishing a non-discretionary bonus plan, it is advisable to develop it in writing specifying all conditions necessary to earn the bonus. Accordingly, employers should consult with legal counsel to insure the terms of the bonus plan do not contain any illegal conditions or criteria.